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What has driven performance in 2QFY13?

Topline grew by 33% YoY during the quarter led by growth in the international formulations and API segments.

Consolidated business snapshot

(Rs m)

3QFY12

3QFY13

Change

9MFY12

9MFY13

Change

Formulations

India

6,956

7,885

13.3%

20,387

21,860

7.2%

US

10,400

14,946

43.7%

24,611

43,659

77.4%

Row

2,809

3,942

40.3%

7,899

11,333

43.5%

Total

20,165

26,772

32.8%

52,896

76,852

45.3%

Bulk

1,536

2,090

36.1%

4,616

5,850

26.7%

Others

17

59

240.8%

23

203

778.8%

Total revenues

21,719

28,922

33.2%

57,535

82,904

44.1%

Domestic business witnessed growth of 13% YoY. The company continues to maintain No 1 position in prescriptions for its Top 5 therapies. Adjusting for the change in treatment of discounts and the expected sales returns, the growth was 19% YoY for the quarter.

During the quarter, the US business continued to witness robust growth of 43% YoY. In the constant currency terms the growth was ~32% YoY. Taro, Lipodex and other new launches were the major contributors to this growth. Lipodex has not only contributed to the company's top-line, but has also helped on the margin front. Though the company has not revealed the amount of revenues from Lipodex, we expect this product to generate around US$100 -US$ 120 m for FY13. As on date total cumulative ANDAs filed are 403, of which 142 products await approvals. The recent acquisition of URL's generic business adds 107 products to Sun's product basket.

ROW markets grew by 40% YoY for the quarter. In constant currency terms, the growth was at ~31% YoY. Excluding Taro, the RoW sales for Sun grew by 58% YoY, during the said period. We believe Taro contributed around US$ 30 m to Sun's RoW segment.

Operating margins declined marginally by 0.5% leading to a 32% YoY growth in operating profits. Large part of growth in the operating profits was helped by favorable currency, Taro products and Lipodex sales.

Bottomline increased by 32% YoY during 3QFY13 led by higher other income despite higher incidence of tax, which grew by 273% YoY.

Update on Sun's acquisitions and subsidiaries

Taro Pharma: Sun Pharma has announced, that both the companies have mutually agreed to terminate the agreement, for buying the outstanding stake of Taro. The shareholders of Taro wanted to increase the bid price of US$ 39.5 per share by Sun. However, as Sun was averse to offer more than the stated price, both the companies mutually decided to terminate the deal. During the quarter, Taro generated revenues of US$ 186 m (up 25% YoY). However, the company has witnessed some volume decline in its products during the quarter and in 9mFY13.

Takeda URL (generics segment): Sun Pharma has completed the acquisition of Takeda's URL generic business (non-Colcrys business). The sales of this business have been pegged at US$110-120 m per annum. With the acquisition of this business, the company will now add URL's products to its US product basket. URL also has some branded products and some 505(b)2 products. Some of them await approval. Further Sun Pharma will continue to manufacture Colcrys products for Takeda for some period. On back of completion of this acquisition in FY13, revenues for two months from URL will be accounted for by Sun Pharma.

Though the management did not disclose the EBITDA margins of the URL business, we believe URL's acquisition will help Sun Pharma fuel its top-line. However, at the EBITDA level the margins will not be very impressive. This will suppress the overall margins of Sun to some extent.

Caraco (Detroit facility): The management of the Sun mentioned that the current utilization of Detroit facility of Caraco is very low. The growth from Caraco will be dependent on the number of products that are cleared by USFDA.

What to expect?

At the current price of Rs 773, the stock is trading at a multiple of 18.5 times our estimated FY15 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company also has filed Para IVs which include FTFs such as Prandin and Gleevec. These products will help to fuel the growth. The current acquisitions will also help in the top line expansion. These factors will enable the company it to enhance its presence in the highly competitive US market. We remain confident about the company's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets.

We had recommended a Buy on the stock in November 2012. At the current price, the stock offers compounded annual return of 9% taking into account the EPS for FY15. Thus, in light of current valuations, we now recommend our investors to HOLD on to the stock.

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